Two defensive growth stocks I'd buy and hold for 10 years
Shares in Hikma Pharmaceuticals(LSE: HIK) and Vectura(LSE: VEC) have taken a battering over the past 12 months falling 60% and 50% respectively following the failure to get their generic version of the Advair Diskus treatment to market. Vectura and Hikma had a lot riding on this treatment. It is designed to grab market share from Advair's owner, GlaxoSmithKline as it will offer the same treatment at a fraction of the cost.
However, regulators do not believe that the product is currently ready for market. At the beginning of May 2017, the partners received a Complete Response Letter from the US Food and Drug Administration, laying out the regulator's concerns about the product and why it wouldn't be approving it for sale. The partners responded to this letter at the end of last year, to try and resolve the regulators' concerns. The critical point of contention is around the results from the Clinical Endpoint Study, which shows the effectiveness of the drug.
Unfortunately, after some consideration, it has been announced today that the FDA has upheld its original decision and has requested that Hikma completes an additional clinical study. This now means the product won't be on the market until at least 2020, several years behind schedule.
Advair was one of Glaxo's best-selling drugs pulling in £5.1bn for the company in 2012. Income has since fallen to nearly £3bn, but there's no denying that it remains a massive moneyspinner for the firm. And now that the treatment has lost patent protection, competitors are rushing to get in on the action. As well as the Vectura/Hikma partnership, generic drugs giant Mylan is also pursuing an alternative. While this treatment has also been knocked back by the FDA, Mylan still has a chance to win a US green light for its version of generic Advair in 2018.
Realising that time is of the essence, Hikma has already finalised the planning of a new clinical study and expects to start patient enrolment in the coming weeks, putting it on track to submit a new study to the FDA in 2019.
In the meantime, these two companies have other products that will pick up the slack.
Safety in diversification
For the first half of 2017, Vectura reported recurring revenues increased £71m up 26% year-on-year and adjusted earnings before interest, tax, depreciation and amortisation more than doubled to £11.1m. A further update at the beginning of 2018 revealed that sales of the firm's Ultibro and flutiform inhaled airways products increased 18% to $101m and 12% to EUR47.8m respectively during the third quarter, and the group ended the year with cash and equivalents of £104m. What's more, there's speculation that Glaxo may take advantage of Vectura's weak share price to launch a 175p per share bid for the company.
Meanwhile, Hikma has just brought in a new CEO, Sigurdur Olafsson with 25 years of experience to help ignite sales growth at the producer of generic drugs, although it seems the market is unconvinced that he will be able to instigate a turnaround. The shares are currently trading at a forward P/E of only 14 and EV/EBITDA ratio of 7.6, less than half the sector median of 16.6. And in my view, despite undeniable issues to face, this valuation severely undervalues Hikma's potential as one of the world's leading generics producers.
So, it might take a few years, but over the next decade, I believe Vectura and Hikma should generate impressive returns for investors as they develop their treatment pipelines.
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Rupert Hargreaves owns shares in Vectura and GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Hikma Pharmaceuticals. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.